Economics 1010 Key Terms Chapter 12 Fall 2020 PDF

**[Economics 1010 - Key Terms -- Chapter 12]** 1. **What is Monopoly?** a. **Is a Market in which?** i. **ONE firm sells a Unique Product to many buyers** ii. **There are Many restrictions on entry into the Market** iii. **Established firms have advantages over ot...

**[Economics 1010 - Key Terms -- Chapter 12]** 1. **What is Monopoly?** a. **Is a Market in which?** i. **ONE firm sells a Unique Product to many buyers** ii. **There are Many restrictions on entry into the Market** iii. **Established firms have advantages over other firms trying to enter.** iv. **Sell and buyers are well informed about prices.** b. **Assumptions** v. **ONE Firms producing in the Market** vi. **Firm sell "UNIQUE" Product** vii. **The Market Demand Curve becomes the Firm's Demand Curve** viii. **Many Buyers must accept the Monopolist Price** ix. **Firms are "Price Setters"** x. **Firms face a "Downward Sloping Demand Curve"** xi. **For every firm, P \> MR** xii. **Firms profit maximize where MR = MC** xiii. **Profits or Losses are present in the Short-Run & the Long-Run** xiv. **HUGE Barriers to Entry into the Market** c. **How Monopoly Arises:** xv. **No Close Substitutes** xvi. **Barriers to Entry** d. **Price Setter:** xvii. **Is a firm sets the market price from the market demand curve.** xviii. **Example: Manitoba Hydro or Canada Post** e. **Barriers to Entry:** xix. **Natural Barrier to Entry:** 1. **Huge *Economics of Scale*, which enables one firm to supply the entire market at the lowest price** 2. **Natural Monopoly:** a. **Produces on the Downward sloping portion of the LRAC Curve (Chapter 10)** xx. **Ownership Barrier of Entry:** 3. **When a one firm owns a significant portion of the "Key Resource"** b. **Example: De Beers at one time controlled 90% of the world's supply of diamonds, today only 65%.** xxi. **Legal Barrier to Entry:** 4. **A market where competition and entry are restricted by the granting of one of the following:** c. **Public Franchise -- Canada Post** d. **Government Licences -- Doctors** e. **Patent -- Big Mac** f. **Copyright -- A Song** 2. **Monopoly Price -- Setting Strategies:** f. **Single-Price Monopoly:** xxii. **Is a Firm that must sell each unit of it output for the same price to ALL it's customers** xxiii. **Example: De Beers Diamonds** g. **Price Discrimination:** xxiv. **Is a Firm that sells different units of a good or a service for different prices.** 3. **A Single-Price Monopoly's Output & Price Decision:** h. **Price & Marginal Revenue:** xxv. [**P**  **\>** **MR**]{.math.inline} xxvi. **Mathematical Proof done in Class Lecture** xxvii. **Graph on p. 282 of the Textbook** i. **Marginal Revenue & Elasticity:** xxviii. **Monopolist ONLY produces on the *Elastic Portion of the Demand Curve*** xxix. **This is the section of the Demand Curve from the Midpoint up to the vertical intercept of the Demand Curve.** xxx. **The Elastic Portion of the Demand Curve corresponds to the portion of the MR curve which is positive.** xxxi. **When the firm increases production past the midpoint of the demand curve, MR will be negative. This means for each additional unit of output the firm produces the additional revenue generated will be negative.** xxxii. **A firm will only produce where MR is positive, which corresponds to the section of the Demand Curve which is Elastic.** xxxiii. **Graph on p. 283 of the Textbook** j. **Price & Output Decision:** xxxiv. **Maximizing Economic Profit:** 5. [**MR** **=** **MC**]{.math.inline} xxxv. **Graph on p. 285 of the Textbook** 4. **Single-Price Monopoly & Competition Compared:** k. **Comparing Price & Output:** xxxvi. **Perfect Competition** xxxvii. **Monopoly** 6. **A Monopolist will always produce less and set a higher price than a Perfectly Competitive firm.** xxxviii. **Graph on p. 286 of the Textbook** l. **Efficiency Comparison:** xxxix. **Perfect Competition:** 7. [\$\\mathbf{CS =}\\left( \\frac{\\mathbf{1}}{\\mathbf{2}} \\right)\\mathbf{\\text{bh}}\$]{.math.inline} 8. [\$\\mathbf{PS =}\\left( \\frac{\\mathbf{1}}{\\mathbf{2}} \\right)\\mathbf{\\text{bh}}\$]{.math.inline} xl. **Monopoly:** 9. [\$\\mathbf{CS =}\\left( \\frac{\\mathbf{1}}{\\mathbf{2}} \\right)\\mathbf{\\text{bh}}\$]{.math.inline} 10. [**PS** **=** **Strange** **Shape** **to** **Calcuate**]{.math.inline} 11. [\$\\mathbf{DWL =}\\left( \\frac{\\mathbf{1}}{\\mathbf{2}} \\right)\\mathbf{\\text{bh}}\$]{.math.inline} xli. **Graph on p. 287 of the Textbook** m. **Redistribution of Surpluses:** xlii. **Some of the lost consumer surplus goes to the monopoly.** xliii. **The monopoly takes the difference between the higher price, and the perfectly competitive price at the quantity sold. This means the monopoly takes part of the consumer surplus.** xliv. **This portion of the loss of consumer surplus *is NOT a Loss to Society.*** xlv. ***Rather, it is a REDISTRIBUTION from Consumers to the Monopoly Producer.*** n. **Rent Seeking:** xlvi. **First, we know that a monopoly creates a DWL and is inefficient.** xlvii. **But, the social cost of monopoly can exceed the DWL because of an activity called *Rent Seeking*.** 12. **Is the pursuit of wealth by capturing *Economic Rent.*** xlviii. ***Economic Rent*:** 13. **Is ANY Surplus such as:** g. **Consumer Surplus, Producer surplus, or Economic Profit** xlix. **A Monopoly makes its economic profit by diverting part of the consumer surplus into economic profit. Therefore, the pursuit of economic profit by a monopoly is *Rent Seeking*. It is the attempt to capture CS.** l. **Rent Seekers Purse their Goals in 2 Ways:** 14. **Buy a Monopoly** 15. **Create a Monopoly** li. **Rent-Seeking Equilibrium** 16. **Graph on p. 289 of the Textbook** 5. **Price Discrimination:** o. **1^st^ Degree Price Discrimination:** lii. **AKA. Perfect Price Discrimination** liii. **Each individual product is sold for a different price** liv. **The Firm Captures 100% of the Consumer Surplus as Profit** lv. **Graph on p. 292 of the Textbook** lvi. **Example: Car Industry** p. **2^nd^ Degree Price Discrimination:** lvii. **AKA. Block Pricing** lviii. **The product is divided up into blocks, and each block is sold for a different price.** lix. **Graph given in Class Lecture** lx. **Example: Electricity, Natural Gas** q. **3^rd^ Degree Price Discrimination:** lxi. **AKA. Group Pricing** lxii. **Groups are divided by their different "Degrees of Elasticity"** lxiii. **Must be able to divide the market into a minimum of "2" groups:** 17. **Sex -- Hair Cuts -- Male vs Female** 18. **Age -- Ticket Prices at a Hockey Game -- Adult, Student, Child** 19. **Time -- Air Line Tickets -- Business vs Holiday Travel** 20. **Location -- Urban vs Rural** lxiv. **Graph on p. 291 of the Textbook** r. **Increasing Profit & Producer Surplus: p. 290 of the Textbook** lxv. **When the firm is successful in charging different prices to every consumer, the monopoly "captures" the consumer surplus (CS) and "converts" it into producer surplus (PS).** lxvi. **More producer surplus means more economic profit.** lxvii. **Total Revenue in the case of Perfect Price Discrimination:** 21. [\$\\mathbf{TR = ((Area\\ of\\ \"the\\ triangle\\ above\\ MC\"\\ ) + (Area\\ under\\ the\\ MC\\ Curve))}\$]{.math.inline} 22. [\$\\mathbf{(Area\\ of\\ the\\ triangle\\ above\\ MC) =}\\left( \\frac{\\mathbf{1}}{\\mathbf{2}} \\right)\\mathbf{\\text{bh}}\$]{.math.inline} 23. [(Area under the MC Curve) **=** **TVC** **=** **(MC** **\*** **Q)**]{.math.inline} lxviii. **Producer Surplus:** 24. [\$\\mathbf{PS = (TR - \"Area\\ under\\ the\\ MC\\ Curve\")}\$]{.math.inline} 25. [**PS=**(**TR** **−** **TVC**)]{.math.inline} lxix. **Economic Profit:** 26. [**Π=**(**TR** **−** **TC**)]{.math.inline} 27. [**Π=**(**TR−**(**TVC** **+** **TFC**))]{.math.inline} 28. [**Π=**(**TR** **−** **TVC** **−** **TFC**)]{.math.inline} 29. [**Π=**(**TR** **−** **TVC**) **−** **TFC**]{.math.inline} 30. [**Π** **=** **(PS** **−** **TFC)**]{.math.inline} s. **Efficiency & Rent Seeking with Price Discrimination: p. 293 of the Textbook** 6. **Monopoly Regulation:** t. **Regulation:** lxx. **Rules administered by a government agency to influence prices, quantities, entry, and other aspects of economic activity in a firm or an industry.** u. **Deregulation:** lxxi. **Is the process of removing regulations of prices, quantities, entry, and other aspects of economic activity in a firm or an industry?** v. **Social Interest Theory:** lxxii. **Is that the political and regulatory process relentlessly sees out inefficiency and introduced regulation that eliminates the DWL and allocates resources efficiently.** w. **Capture Theory:** lxxiii. **Is the regulation serves that self-interest of the producer, who captures the regulation and maximizes economic profit?** 7. **Efficient Regulation of a Natural Monopoly:** x. **Marginal Cost Pricing Rule:** lxxiv. [Profit Maximizing Quanity (**Q\***) **is** **where,**  **P** **=** **MC**]{.math.inline} lxxv. [**Economic** **Loss=**(**LRAC** **−** **P**) **\*** **Q\***]{.math.inline} lxxvi. [**Govenment** **Subsidy** **=** **Economic** **Loss=**(**LRAC** **−** **P**) **\*** **Q\***]{.math.inline} lxxvii. **Graph on p. 296 of the Textbook** y. **Average Cost Price Rule:** lxxviii. [Profit Maximizing Quanity (**Q\***) **is** **where,**  **P** **=** **LRAC**]{.math.inline} lxxix. [**Economic** **Profit** **=** **0,**  **where** (**P** **=** **LRAC**) at Q**\***]{.math.inline} lxxx. **Graph on p. 296 of the Textbook** z. **Rate of Return Regulation:** lxxxi. **A firm must justify its price by showing that its return on capital does not exceed a specific target rate.** a. **Price Cap Regulation:** lxxxii. **Is a *Price Ceiling*:** 31. **-- a rule that specifies the highest price the firm is permitted to set.** lxxxiii. **Price Cap is set equal to the Price where LRAC cuts the Demand Curve.** lxxxiv. **Price Cap Outcome is the Quantity where P = LRAC.** lxxxv. **Graph on p. 297 of the Textbook**